The currency crisis exposes the vulnerability of the Argentine economy

The currency crisis exposes the vulnerability of the Argentine economy

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This content was published on May 17, 2018 19:23 May 17, 2018 – 19:23

The Argentine currency crisis that depreciated the currency by almost 20% in a month and devoured 10 billion dollars of its reserves exposed the fragility of the economy that can stifle growth, analysts estimate.

The government managed to weather the exchange rate at the cost of bringing the interest rate, the highest in the world, to 40%, and a bold issuance of Treasury bonds of around 73,000 million pesos (almost 3,000 million dollars) at 20% annual.

“The move was to show that in the midst of all these tensions, foreign investors could be attracted even if the conditions of the bond were bad for Argentina,” economist Matías Carugati told AFP. The risk will be “not to fall into temptation,” he said.

Although Argentina reduced its fiscal deficit by four points, it remains at high levels (3.9% of GDP in 2017) for an economy that has its trade balance in red with an import-opening policy and deals with an inflation that added 9 , 6% between January and April.

The International Monetary Fund (IMF) had already suggested greater fiscal rigor before the president came last week to the agency to ask for financial aid.

“The currency crisis was a crisis of confidence because Argentina has a fragile economy with a fairly large external deficit that it must finance,” Carugati said.

According to Stéphane Straub, an economist at the Toulouse School of Economics, “the problem comes from the budget deficit and more fiscal rigor will be necessary” in the future.

Since the monumental crisis of 2001 when the country declared itself in default, all convulsions and adjustment prospects unleash fear among Argentines.

– Ghosts of recession –

Macri admitted that Argentina will have “a little less growth and a little more inflation this year”. How much ?, impossible to estimate for now.

Argentina grew 2.8% in 2017 and advanced by 4.7% in the first two months of this year, driven mainly by construction (+ 12.7%). “The public work was the only engine that had been sustaining economic growth amid a sharp fall in consumption,” he told AFP Mercedes D’Alessandro, PhD in Economics at the University of Buenos Aires.

“In two years there were lukewarm signs of growth and more employment, but now that is going to suffer, I do not see an economic plan that ensures that next year there will be no recession,” he added.

The high level of rates does not help the productive economy either.

“With rates at 40% banks will be happy,” said Straub, for whom these high interest rates “will have recessive effects in the medium term.”

Carugati predicted that it is a “transitory” measure. “No economy works with these interest rates, companies are left without financing and the payment chain is cut,” he warned.

High rates are the tool of the Central Bank to keep inflation in check, which nevertheless resumed the upward trend: from 2.4% in March it climbed to 2.7% in April and it is expected that in May it reflects the transfer to the prices of the depreciation of the peso in an economy governed by the dollar.

“But we will have to change the policy and they will have to lower the rates because if they do not, inflation will fall but not because of economic policy but because of the recession,” the economist estimated.

Regarding the ability to pay, he said that “Argentina does not have a solvency problem, as long as it has a medium-term horizon with economic growth, inflation at normal levels and if it makes a fiscal adjustment. we will see”.

– Create trust –

.

Like the story of the chicken and the egg, Argentina now faces the problem of creating confidence in its economy to scare away its economic problems.

“In order to lower rates, it must generate confidence and in that, the intervention of the IMF can be useful,” Straub said, believing that it can help curb capital flight and exchange pressure.

On the other hand, the permanent deficit of the State “is a structural problem in Argentina, difficult to resolve politically,” he said.

“The IMF is associated with painful moments in Argentine history,” he recalled, but considered that Macri “does not have many alternatives” to the adjustment.

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